Russia has borne Western sanctions before. Is this time different?

Nadezhda Mamonova, a Moscow office worker, says she’s learned to take life “day by day” amid talk of war with Ukraine and devastating Western sanctions that are threatened to follow.

Like most Russians, she’s been watching this movie for about eight years, ever since Russia annexed Crimea and the West began ratcheting up economic and financial punishments that, by all accounts, have caused both direct and indirect damage to Russia’s economic prospects.

“I feel it every time I go shopping,” she says, seeming to conflate Western sanctions with a host of other problems faced by Russian consumers, like inflation, high taxes, the devaluation of the ruble, and endless COVID restrictions. “I am far from politics, but these war games on both sides can only make a person feel alarmed.”

Ms. Mamonova’s frustrations are common among Russians, for whom daily life has gradually worsened in recent years. But the Russian economy, though stagnating, is still slowly growing. Most Russians have adapted over the past several years, and they appear ready to roll with whatever new punches may be coming.

Russian experts are more worried about the threatened new sanctions that would be imposed if Russia actually launches a military attack on Ukraine. The most extreme measures might include canceling the not-yet-operating Nord Stream 2 gas pipeline from Russia to Germany; banning Russian banks from using the U.S. dollar; and draconian sanctions against people in President Vladimir Putin’s inner circle, their families, and possibly Mr. Putin himself.

But even those weapons are unlikely to change the Kremlin’s plans, experts say.

“If these threatened sanctions are applied, there would be some shocks to Russia’s banking system, financial position, and some industries would suffer,” says Anastasia Likhacheva, a faculty dean at Moscow’s Higher School of Economics. “But since 2014 there has been a great deal of Russian strategic planning, and the country is much better prepared for sanctions than it was. If we’re just speaking of sanctions, I cannot imagine any sanctions that could push Russia to give up its strategic priorities” in the crisis over Ukraine and NATO.

Years of preparation

Mr. Putin on Tuesday said he welcomed further negotiations over the status of Ukraine and Russia’s security. His statement, along with a declaration from Russian military officials that some troops near the Ukrainian border would soon return to their bases, could be signals to ratchet down tensions in Europe.

But if that proves untrue, it’s not clear that Western sanctions would dissuade the Kremlin from pushing ahead in Ukraine. 

According to an International Monetary Fund report, international sanctions shaved no more that 0.2% from Russia’s GDP annually between 2014 and 2018. Other things, like plunging oil prices, caused far more damage to the average Russian. So did the Kremlin’s responses to sanctions, which involved letting the ruble suffer massive devaluation rather than defending it with currency reserves, keeping interest rates extremely high in order to keep inflation under control, and reining in social spending to adjust to the revenue shortfall caused by lower oil prices.

Such methods have suppressed economic growth, and Russian consumers have borne the costs, but the Kremlin has assembled an impressive war chest. Russia’s currency reserves are near an all-time high at over $630 billion, and its National Wealth Fund – garnered from excess hydrocarbon revenues – is over $130 billion. Except for the two pandemic years, Russia’s government has run budgetary surpluses, while state debt is among the lowest in the developed world at about 18% of GDP.

The government has also introduced a payment system to rival the dominant position of U.S.-based Visa and Mastercard, which millions of Russians now use to receive pensions and other benefits. Working with China, Russia has also begun to remove the U.S. dollar as a factor in bilateral trade.

Despite these powerful hedges, which would protect the state’s financial system, the threatened ban on using U.S. dollars would still cripple many Russian banks, and be a catastrophe for many average Russians, experts admit.

“Many Russians still keep their savings in dollars, and a ban on that might instigate panic,” says Yevgeny Gontmakher, an economist and former Russian official. “Most of our trade, even with China, is still conducted in dollars. This could lead to severe shortages, even of foodstuffs, and people will rush to get their money out of banks while they can. People will be angry, and this would be a danger to authorities.”

Truly robust sanctions, such as cutting Russia out of the SWIFT bank messaging system, might make any financial transactions with the West impossible. For the U.S., which has little trade with Russia – though it does import significant amounts of oil, titanium, and also rocket engines for NASA – that might not be a huge problem. But for the European Union, which gets almost 40% of its energy from Russia, a supply breakdown could be catastrophic.

Some Russian economic sectors have actually benefited from sanctions, as well as from the counter-sanctions Russia fired back with at the start of the crisis. Import substitution has made the Russian arms industry far more independent, especially from Ukrainian inputs, than it was before. And Russian agriculture has positively boomed after the cutoff of food imports from the European Union.

Russians ready for sanctions?

So far the Russian public has shrugged off the escalating sanctions of the past eight years, in large part because they cannot see any direct impact in their personal lives.

“We actually see a decrease in public anxiety over sanctions,” Denis Volkov, director of the independent Levada Center, said in a commentary on his agency’s comprehensive polls of Russian attitudes about sanctions. “Back in 2015, over half of people said that sanctions concerned them. Today it’s around 25%. ... The general attitude is that Western countries are against us. If at first it was seen as a response to [the annexation of] Crimea, the more time passes the more people see it as a constant: They are against us, they have always been against us, we just have to accept it.”

Some Russian industries have been hurt by technology restrictions and some, such as electronics, would be slammed hard if those were extended to any product with a U.S. component in them, such as computers and cellphones.

Much would depend on whether other non-Western countries, especially China, would defy U.S.-led sanctions, say experts.

“Theoretically, China might be interested in an anti-sanctions alliance with Russia,” says Ivan Timofeev, a sanctions policy expert with the Russian International Affairs Council, which is affiliated with the foreign ministry. “Chinese banks, so far, have largely obeyed U.S. sanctions, and other Chinese companies are likely to comply as well, especially in areas where they have some international market share.”

But Russian analysts laugh at the suggestion that sanctions on Russia’s elite are likely to have any impact. They point out that Russia is no longer an oligarchy in the sense that the rich hold political power, as they did in the 1990s. The hallmark of the Putin era has been the restoration of state supremacy and the subordination of the rich to Kremlin goals.

“The logic of such sanctions is counter-productive. We have an elite who are absolutely dependent on state service, and if they were hit by sanctions, they would have to draw more tightly around Putin for protection,” says Dmitry Suslov, an expert at the Moscow Higher School of Economics. “On that level, Putin is bulletproof.”

As for radical sanctions, Mr. Suslov says. “We all hope for a diplomatic solution to this crisis. But if it comes to the worst, Russia will not relinquish its strategic priorities. And if the U.S. enacts these extreme sanctions, it will be bad for everyone, but the West will no longer have any leverage at all over Russia.”